A.M. Best Co. has downgraded the financial strength rating to B+ (Very Good) from A- (Excellent) of Louisiana Farm Bureau Mutual Insurance Company (LFB) (Baton Rouge, La.). The rating has been removed from under review and assigned a negative outlook.
The downgrade is attributable to the deterioration in LFB’s risk-adjusted capitalization following losses from hurricanes Katrina and Rita. LFB’s rating was originally placed under review with negative implications on Sept. 15, 2005, in response to initial loss estimates associated with Hurricane Katrina. Although these estimates did not increase and were within LFB’s reinsurance protection, the rating remained under review due to Hurricane Rita loss estimates as well as pending discussions with management regarding capital enhancement plans.
As a result of significantly higher loss settlements on Hurricane Rita claims, which have escalated to over $200 million, and additional surplus loss due to reinsurance reinstatement costs, LFB’s surplus decline was considerably outside of A.M. Best’s expectations and accounts for a substantial portion of its capital. Although management was able to enhance capital through a surplus note, a negative rating action is warranted at this time given the magnitude of the losses and surplus decline.
The negative outlook is based on A.M Best’s expectations that operating earnings will be strained beyond 2005 due to increased reinsurance costs, decreased investment income and interest payments on the surplus debentures.
Furthermore, LFB’s gross catastrophe exposure relative to surplus has considerably increased, and A.M. Best remains concerned with the timely execution and reduction in gross catastrophe exposure as well as LFB’s overall risk concentration.
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